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In every area of practice, WilmerHale brings the insight, dedication to excellence, and commitment to client service needed for our clients to achieve their business objectives. Our five-department structure and team approach to service enable us to provide the highest level of responsiveness and access to lawyers with the most appropriate experience.

The FCA’s enforcement outlook for 2018

On 21 March
2018, the Financial Conduct Authority (“FCA”)
published a consultation document setting out its approach to enforcement for
2018. The paper aims to provide clarity and transparency on how the FCA
exercises its enforcement powers, broadly outlining its strategy for
identifying, investigating and sanctioning misconduct. This article discusses
two key points of the consultation paper – investigations and penalties –
before considering possible areas of focus for the FCA in 2018.

The consultation
document is clear that the FCA is emphatic in its commitment to open
investigations into any potential misconduct. It has, in the past, been
criticised for mishandling high-profile investigations and, in particular, for
failure to investigate senior executives for possible wrongdoing. In responding
to this, the FCA is now using its investigatory powers as a pure fact-finding
tool, launching investigations where misconduct is suspected but evidence is
far from conclusive. The necessary corollary of such a strategy is that, while
more investigations are being opened, the FCA is keen to emphasise that where
no evidence of misconduct is found, investigations will be promptly
discontinued with no further action.

While it is
laudable that the FCA wants to run down any and all avenues of suspected
misconduct, there is one key potential issue with such an approach. Ultimately,
however well-intentioned, the FCA does not have unlimited resources.
Investigations are expensive and time-consuming; the more investigations that
are opened, the further resources are stretched, and the longer and less
effective investigations become. This could adversely impact the quality of the
investigation and its outcome. Mark Steward, Director of Enforcement and Market
Oversight at the FCA, has said that this increase in investigative work will
not lead to the need for additional resources, but that the FCA will become “vastly more efficient, strategic and focused.”1
However, it is difficult to see how this will work in practice: the
investigative workload cannot continue to increase indefinitely without a
corresponding budgetary increase. It is also important to consider the impact
of this approach on those under investigation. The longer an investigation runs
on, the more detrimental it becomes, both personally and professionally, on
individuals subject to scrutiny. The FCA must consider how best to balance the
desire to investigate all potential misconduct with the financial and human
implications of doing so.

Secondly, the
FCA’s consultation document notes its intention to conduct a review of its
Penalties Policy, before publishing a consultation paper later in 2018. This
review must take into account a changing regulatory landscape, and will
hopefully provide clarity and transparency in how the FCA intends to approach
sanctions for misconduct.

One way in which
it may do this is a new emphasis on redress rather than fines, an approach
introduced by Mr. Steward, and referred to in the consultation document. The
consultation document outlines the fact that, where deemed necessary, restitution
orders or redress schemes may be put in place to help compensate the victims of
misconduct. This strategy, while more directly beneficial to victims than
levying large fines, may also assist the FCA in demonstrating a clear,
quantifiable link between harm and sums ordered to be paid, and directly assist
in achieving one of their statutory objectives of consumer protection.

With these two
aspects of the FCA’s approach in mind, we turn to where the FCA’s focus on
enforcement may be for 2018. Two particular areas in which we are likely to see
increased action are those where the FCA has received recent criticism: money
laundering enforcement and individual accountability.

Andrew Bailey,
Chief Executive of the FCA, recently gave evidence to the Treasury Committee on
the FCA’s commitment to holding both firms and individuals accountable for
money laundering. Although the FCA imposed a fine on Deutsche Bank in January
2017 totalling £163m for failure to maintain an adequate anti-money laundering
control framework, there has been criticism that a lack of prosecutions
suggests that the FCA is soft on enforcement. Accordingly, a key objective in
2018 is for the FCA to not only understand the nature of the money laundering
issues plaguing the UK financial system, but to begin to put in place robust
procedures to identify, investigate and sanction money laundering offences. The
use of Unexplained Wealth Orders (“UWOs”),
introduced by the Criminal Finances Act 2017, will likely be a valuable tool in
pursuing this part of the enforcement agenda. UWOs allow agencies such as the
FCA to require individuals suspected of involvement in serious crime to account
for the source of their assets where they appear to be inconsistent with their
known income level. Although it is as yet unclear how widely UWOs will be used,
they have the potential to be a powerful tool in the fight against money
laundering.

Individual
accountability is also likely to be a key area of focus. Following the
introduction of the Senior Managers Certification Regime (“SMCR”) in 2016 to the UK’s banking industry, the FCA proposes to
extend the SMCR to all other FCA regulated firms. This is part of a push to
implement a more effective sanctions and enforcement regime against senior
individuals, creating a culture of personal accountability within the City. The
FCA has, in the past, been heavily criticised for failure to investigate senior
individuals for wrongdoing in their area of responsibility. 2018 will likely be
the year we see a tougher stance on individual accountability to prove that the
FCA recognises and is addressing problems where necessary.

Of course,
enforcement is only one aspect of the FCA’s work and, with the looming deadline
of Brexit, much of its resources in 2018 will likely be subsumed in the
transition period and onboarding of regulations pertaining to the functioning
of the UK’s financial services industry. It has recently been announced that it
will require an extra £16m of funding to adequately deal with Brexit-related
work, and that other projects may take a backseat while this is dealt with.
Although the FCA is clearly committed to investigation and enforcement, it is
evident that Brexit will be a top priority in 2018.2

In every area of practice, WilmerHale brings the insight, dedication to excellence, and commitment to client service needed for our clients to achieve their business objectives. Our five-department structure and team approach to service enable us to provide the highest level of responsiveness and access to lawyers with the most appropriate experience.